Mobile Apps Market Scales Up From Zero To BillionsRoughly 3 billion apps have been downloaded for Apple's iPhone, iPod Touch and iPad. Nearly 80 percent of apps are free. Three years ago the industry barely existed. But recent studies suggest the app economy could top $20 billion in a few years.

Roughly 3 billion apps have been downloaded for Apple's devices. Analysts say Apple has helped expand the app economy from a market offering free apps into one with annual revenues of up to $6 billion.
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Screengrab via Apple.com

Roughly 3 billion apps have been downloaded for Apple's devices. Analysts say Apple has helped expand the app economy from a market offering free apps into one with annual revenues of up to $6 billion.

Screengrab via Apple.com

Apps are now big business.

Three years ago the industry barely existed. But recent studies suggest the app economy is growing rapidly and could top $20 billion — the amount Americans spend on children's clothing — in just a couple of years.

"You know, when Apple recognizes you or when you get up in the morning and you see all the downloads, it's like Christmas everyday," Anderson says. "It's like caffeine because people appreciate what you've done, so you want to do more."

The Advantage Of Free Apps

Anderson's new app, which converts Celsius temperatures into Fahrenheit, can be downloaded free. That means he's not making a penny from this app.

"I think every developer will tell you — you'll get 10 to 15 times more downloads for free than if it costs money," Anderson explains.

Roughly 80 percent of all apps are free. Many of the rest cost just 99 cents.

So how did a market, which focuses on free and almost-free apps, grow into an industry with annual revenues of $5 billion to $6 billion? Analyst Chetan Sharma offers a one-word explanation: Apple.

"Apple really changed the game in many ways. They made it very simple for developers to get their application to the App Store in front of the consumers," Sharma says.

And once it was easier, faster and more lucrative to develop apps and sell them, more developers began to create them. The promise of a digital Swiss army knife became a reality.

But making money from apps is another story.

Charles Golvin, a senior analyst at Forrester Research, says developers who sell millions of their apps — even for a tiny price — can turn a profit.

"It could be someone as big as Electronic Arts, the largest gaming publisher, or could be two guys in a garage," Golvin says.

And the guys in the garage who are giving their app away free may be hoping to eventually sell a premium version — or sell something that goes with it.

Developers typically get 70 cents of every dollar spent to download their app. Golvin says the platform provider — like Apple — gets the rest. And then there's a separate stream of revenue from advertising.

Advertising Dollars

Developers get most of the advertising dollars, but companies that that serve up ads make money as well. Zumobi, a Seattle-based company, creates apps and places advertisements to go with them.

"We have several apps coming out focused on the female demographic, parents, [and] that audience is obviously very attractive to advertisers," says John SanGiovanni, a co-founder of Zumobi.

The company often partners with big content providers like NBC and Motor Trend.

Ken Willner, Zumobi's chief executive officer, suggests that being big in the app industry has some advantages.

"As a publishing network, we can cross-promote aggressively all of our applications," Willner says. "For example, you've downloaded our Motor Trend App; we will also suggest our NASCAR app — very, very big advantage and frankly something the two guys in the garage can't take advantage of."

As the number of apps has exploded, it's becoming more difficult for small guys to get noticed.